NBK Wealth Thought Leadership: The US Elections 2024: Game Changer or No Change at All?
This year’s US elections would likely carry the most material risks of impacting global economic prospects - and hence financial markets - given the ongoing shifts in the international order. Alongside the reverberations of the outcome of the Presidential race, the concomitant renewal of the entirety of the House of Representatives and of one third of the Senate makes this most important political appointment even more analyzed.
A “Gridlock” outcome is the most likely this time around, even if a “Sweep” cannot be ruled out. The “Gridlock” scenario is arguably financial markets’ preferred outcome as it keeps the adoption of controversial, partisan policies less likely to cause unnecessary surprises and disruptions even if they might imply lengthy attempts to reach compromises, while the repercussions of either “Sweep” scenario can be serious enough to entail broader and deeper policy changes across a variety of issues. However, while over the long run it is US policy that will have the greatest implications, in the short to medium term US politics can matter big time for the economy and markets.
The most likely combination of potential policies associated with the possible outcomes of the elections are:
- Republican Sweep (Republican control of the White House and Congress): Material realignment in trading relations, deregulation across some sectors, tighter immigration rules, and easier fiscal policy.
- Democratic Sweep (Democratic control of the White House and Congress): Easier fiscal policy, more spending. Less changes to trade and immigration policies. Minor changes in regulation.
- Divided government/Trump (Republican control of the White House, divided Congress). More dramatic realignment in trading relations and tighter immigration. Easier fiscal policy. More limited changes in regulation.
- Divided government/Harris (Democratic control of the White House, divided Congress). Maximum “gridlock”. Little change to trade and immigration policies. Low odds of expansionary fiscal policy. Regulatory framework broadly unchanged.
Let’s now have a look at the main differences in the two camps’ potential stance on two key policy issues: trade and fiscal policy. Both areas could in fact have more immediate implications on interest rates, currency and equity markets, with ripple effects on a global scale.
The only area where both parties have found a broad non-partisan convergence is China-related policies. The next US President will likely keep supporting trade policies that prioritize advancing US technological supremacy and tightening national security. From this perspective, markets should welcome a gradual approach to realigning American interests away from the Asian rival by “re-shoring” (i.e. bring back to US soil) some domestic manufacturing, boosting technological innovation and re-directing trade toward USMCA (United States-Mexico-Canada) partners. In contrast, markets would foresee greater risks if broad-based increases in import tariffs were to be adopted, as potential retaliatory action from impacted countries would trigger adverse global trade and growth dynamics.
Trump’s agenda is oriented toward the implementation a sharp increase in tariffs (60% on imports from China, 10% on imports from the rest of the world). However, Mexico is now the US’s biggest trading partner.
If implemented, this proposal would represent a temporary increase in inflation. Under this scenario, it has been calculated that core inflation would rise up to 0.3-0.4%. Should also the 10% universal tariff on all imports be adopted, the impact on consumer prices would be close to three times higher. Under a new Democratic administration, on the other hand, we would only see a low probability of further increases in tariffs.
In fact, the potential appreciation of US Dollar as a consequence of higher interest rates might contain the negative impact: simulations have shown that a 10% permanent appreciation in the Dollar could reduce core inflation by about 0.4%. Also, a decline in external trade volumes might reduce the importance of certain goods even if domestic substitutes may be more expensive.
Also, timing and sequencing of legislation, implementation and execution of any new tariff-related measures do matter. This could in fact mitigate the negative side-effects on both inflation and consumer spending.
On the fiscal policy side, we believe that in either sweep scenario a higher fiscal deficit is very likely. However, the composition of the deficit would vary between higher spending (Democratic sweep) or lower taxes (Republican sweep). In general, however, fiscal policy changes will take time to materialize as looser conditions would cause short-term growth to be boosted alongside upside pressure on inflation and interest rates. Overall, the impact may end up negatively affecting global growth. Three factors might cause the effects of policy changes to be felt only from 2026 onward:
1- The personal tax cut provisions of the 2017 Tax Cuts and Jobs Act will only expire at the end of 2025;
2- Congress will be preoccupied with the end of the debt-ceiling suspension on Jan. 1st 2025 in a potentially tense environment; and
3- As neither party is expected to have a 60-seat majority in the Senate, the process to pass any major legislation will take time.
We believe that the key fiscal risk to markets is related to the full extension of the expiring individual tax cuts, which poses the greatest upside risk to growth, inflation and government debt.
The federal tax rate on corporate income was lowered to 21% in 2017, aligning the US with its peers. A Republican Sweep could entail a deeper cut to 15%. A Democratic Sweep would bring an increase of the statutory rate to 28%.
Currently the debt/GDP ratio is projected to grow from 102% in 2026 to 125% in 2035, and it would continue to grow faster than the economy under either candidates’ plans (Harris: 133%; Trump: 142%, i.e. an increase of 8% vs 17% of GDP in either scenario).
